MARKET UPDATE 24.51
WEEKLY REVIEW
US Economic Insights
Housing Market:
The housing market offers a revealing snapshot of broader economic fragility. Despite lower mortgage rates, sales have risen only marginally, and new housing starts remain subdued, particularly in multifamily projects. High prices persist, not simply as a result of supply and demand, but due to the structural constraints of limited inventory and cautious developer behavior. These dynamics suggest a market struggling to adjust under the weight of elevated borrowing costs and affordability challenges.
From a macro perspective, this stagnation underscores the limited impact of monetary policy in addressing underlying issues. Rate cuts have done little to spur meaningful activity, exposing the gap between financial incentives and real-world constraints like relatively flat to falling REAL wages and consumer confidence. Developers’ hesitation to expand new projects implies a broader caution, aligning with other indicators of economic uncertainty, such as declining manufacturing output and weak labor market trends.
While housing has historically served as a key driver of economic recovery, its current trajectory points to a more constrained role. The housing market risks remaining a drag on broader growth. The housing sector, far from signaling resilience, reflects an economy navigating persistent headwinds and limited by unresolved imbalances. The iatrogenic folly here is that policy makers continue the prescriptions and interventions despite the results.
Existing home sales rose marginally in November, with a seasonally adjusted annual rate of 4.15 million. Inventory remains tight, keeping prices elevated.
Housing permits increased by 6.1% in November, while housing starts declined 1.8%.
Labor Market:
The labor market presents a mixed and increasingly fragile picture, as evidenced by the data. Initial unemployment claims fell slightly to 220,000 for the week of December 14, but this decline remains out of sync with historical seasonal patterns, where claims typically dip more substantially during the holiday hiring season. The four-week moving average, hovering at 225,500, indicates a modestly higher baseline than last year, signaling underlying labor market weakness. The labor market, contra the narrative, by no means implies inflationary pressure. In fact, one could argue the opposite.
Continued claims, reflecting ongoing joblessness, remained nearly static at 1.87 million, marking little progress despite this broader narrative of a "tight labor market." This underscores the labor market's inability to absorb displaced workers or generate sufficient new positions to meaningfully improve conditions. What the figures suggest is that even in the seasonally strongest hiring period, demand for labor is lackluster, with limited opportunities and increasing signs of economic strain.
Employers, particularly in interest rate-sensitive industries like manufacturing, have reduced hiring and maintained a cautious stance, further exacerbating the labor market's vulnerability. While layoffs remain muted, the absence of significant new hiring or wage growth underscores broader concerns about stagnant income levels and declining consumer confidence. Economic retrenchment doesn't start with mass unemployment and layoffs, the concerns are borne out in hiring activity (Shimer).
Consumer Behavior:
Retail sales growth in November, driven largely by a 2.63% surge in auto sales, offered little reassurance as spending outside this category remains stagnant, growing a mere 0.2% month-over-month. Stripping away inflationary effects, real spending reveals a consumer increasingly paying more to get less. All the while wage growth and opportunities stagnate. Clearly, an unsustainable dynamic. Squeezed disposable incomes and diminishing purchasing power can only tolerate elevating/elevated prices for so long before trade offs are made. Industry at the margin of consumer preferences will be hit first. As we can see with McDonalds, Starbucks, Target and the like.
E-commerce platforms saw robust activity during the holiday shopping season, indicating a shift toward price-sensitive purchasing behavior. However, traditional brick-and-mortar retailers continued to report bleak outlooks, signaling broader structural shifts in consumption patterns that leave "old economy" retail struggling to maintain relevance (Cyber Monday Reports; Retail Surveys).
November’s slight increase in personal spending coincided with a decline in the savings rate to 4.4%, underscoring a troubling reliance on savings to sustain even modest expenditure growth (Bureau of Economic Analysis). This erosion of financial cushions, paired with tepid income gains, reflects an economy straining under the weight of persistent inflation and labor market fragility.
In aggregate, the data paints a picture of a consumer stretched thin, attempting to balance rising costs, stagnant wages, and eroded savings. While headline numbers may suggest stability, the underlying fundamentals reveal a far more tenuous reality—one that casts doubt on the consumer’s ability to sustain economic momentum without significant structural relief. They are certainly mindful and making trade-offs and trading down.
"The company’s results were primarily driven by softness in North America’s revenues in the quarter, specifically a
6% decline in U.S. comparable store sales, driven by a 10% decline in comparable transactions, partially offset by a
4% increase in average ticket."
(Starbucks Q4: https://s203.q4cdn.com/326826266/files/doc_financials/2024/q4/4Q24-Early-Announcement-10-22-24.pdf)- Retail sales grew 0.69% in November, driven by a 2.63% increase in auto sales. Excluding autos, sales grew only 0.2%.
(Source: US Census Bureau - Monthly Retail Trade Report Published 12/17/2024: https://www.census.gov/retail/marts/www/marts_current.pdf) "[D]espite the new tide of optimism, consumers across income levels and generations said they plan to keep their spending habits relatively subdued, particularly in discretionary and luxury categories. Their reported spending intentions suggest consumers are willing to delay immediate gratification in favor of long-term financial stability."
"The share of consumers trading down—opting for lower-priced goods, delaying purchases, or taking another action to save money or get more value from a purchase—remained persistently high. (....) [B]ut 74 percent said they continued to trade down, suggesting that this behavior is stickier than experts expected."
Industrial and Manufacturing Activity:
The industrial sector continues to contract under the weight of systemic pressures and stumbling global demand. November marked the third consecutive month of declining industrial production according to the PMI, falling 0.15% after sharper drops in prior months, leaving the year-to-date index down 0.9%. Capacity utilization sank to 76.79%, a new cycle low, highlighting the sector’s growing slack as production scales back to align with weakening consumer and business demand.
Manufacturing PMIs reflect similar struggles, with December’s S&P Global index sliding further into contraction at 48.3—a sharp divergence from the services sector’s relative optimism. This bifurcation between manufacturing and services underscores an economy where structural imbalances are becoming increasingly evident. For manufacturers, particularly those reliant on consumer goods production, lower output and eroding sentiment point to persistent demand shortfalls, even in a climate of slightly easing borrowing costs.
Auto manufacturing presents a rare bright spot, buoyed by modest rebounds in sales, but this sector alone cannot offset the broader malaise. Outside of autos, production volumes are in decline, compounding the sector’s challenges as cost pressures collide with cooling demand. Employers in manufacturing, already cautious in hiring, may face growing pressures to reduce headcounts, further amplifying economic headwinds.
In sum, the industrial and manufacturing sectors reveal an economy losing steam at its core. The persistence of contractionary forces and the absence of a clear catalyst for recovery suggest that these sectors will remain a drag on economic performance, exposing the fragility of the post-pandemic rebound and the limits of rate-driven stimulus.
Global Economic Highlights
China:
China’s economic narrative remains one of muted growth and structural vulnerability, where the veneer of stability masks deeper systemic fragilities. Industrial production grew 5.4% year-over-year in November, a rate that appears steady on the surface but offers little reassurance when viewed against the backdrop of tepid global demand and limited domestic consumption. Further, retail sales growth slowed sharply to just 3%, erasing prior upward revisions and signaling a consumer sector still struggling under the weight of weak income growth and fading confidence.
As has become quite usual for Xi and Company, housing market concerns persisted with home prices falling another 0.5% month-over-month, extending an entrenched decline that underscores the broader fragility of China’s real estate sector—a linchpin of its economic engine. Efforts to stabilize prices and activity appear increasingly ineffectual, as speculative demand evaporates and structural overbuilding limits any meaningful recovery.
In the financial sphere, record-low bond yields highlight mounting distress in the banking system and a lack of confidence in Beijing’s ability to orchestrate a turnaround. The so-called “Beijing bazooka” stimulus measures introduced in September have already fizzled, leaving China with little to show for its policy experimentation beyond deeper questions about its economic trajectory.
China’s challenges are not confined within its borders. With its economy closely tied to global supply chains and trade, these internal weaknesses ripple outward, constraining growth prospects for trading partners and further amplifying global economic uncertainty. The picture this is painting is one of an economy struggling to find its footing, with limited tools and diminishing returns from traditional interventions, posturing, and stimulus.
- Industrial production grew 5.4% year-over-year in November, but retail sales growth slowed to 3%. Housing prices declined 0.5% month-over-month.
Bond yields reached record lows, signaling distress in the banking sector and ineffective stimulus.
Europe:
Europe’s economic picture remains one of persistent stagnation, where fleeting signs of improvement are consistently overshadowed by entrenched structural challenges. Manufacturing PMIs for December stayed firmly in contraction at 45.2, highlighting the continued struggles of the continent’s industrial backbone, while services PMIs offered a modest uptick to 51.4, i.e. barely breaching expansion territory. This divergence highlights the fragility of Europe’s economic recovery, with any optimism confined to sentiment rather than substantive growth.
Germany, the region’s economic engine, remains mired in recessionary conditions. The IFO Business Climate Index dropped to 84.7, its lowest level since May 2020, signaling that expectations for a turnaround are fading. Consumer confidence across Europe has also declined for the second consecutive month, reflecting growing concerns over labor markets and incomes that even the European Central Bank’s steady rate cuts have failed to alleviate. There we go again, by the way, evidence of falling GLOBAL demand impulse.
The broader European economy shows little evidence that policy interventions have meaningfully shifted the trajectory. While rate cuts aim to stimulate activity, their impact has been dulled by persistently weak demand, labor market fragility, and ongoing structural imbalances. Industrial activity remains subdued, and consumer spending offers no meaningful offset, as households continue to grapple with inflationary pressures and eroded purchasing power.
Europe’s economic stagnation increasingly appears self-reinforcing. The lack of robust recovery momentum, coupled with fragile consumer and business sentiment, leaves the region exposed to further shocks. Europe here risks remaining in a prolonged state of economic limbo if not downright contraction. Their incremental "adjustments" continue to fail to address systemic weaknesses.
Eurozone manufacturing PMIs remained at 45.2, signaling contraction, while services rebounded slightly to 51.4.
German sentiment indices showed ongoing recession-like conditions; the IFO Business Climate Index dropped to 84.7.
Emerging Markets:
Emerging markets find themselves increasingly at the mercy of global economic turbulence, as local vulnerabilities collide with external pressures. Brazil’s real and India’s rupee are emblematic of the mounting challenges, both currencies hitting record lows despite aggressive central bank interventions. In Brazil, the central bank raised its benchmark rate by 100 basis points and engaged in direct market interventions, yet these measures proved fleeting in their effect as the real continued to slide, underscoring deeper structural economic weaknesses.
India’s trade balance provides another stark example of fragility. In November, exports fell sharply by 5.3% year-over-year, while imports surged to a record $70 billion, driven by geopolitical and supply-chain uncertainties - AND GOLD. This ballooning trade deficit adds significant downward pressure on the rupee, further complicating the Reserve Bank of India’s ability to stabilize the currency. Both economies illustrate the broader challenge of navigating global dollar scarcity in a rising risk-premium environment, where traditional policy tools like rate hikes and direct interventions increasingly fail to deliver stability.
Across emerging markets, these trends reflect the dual burdens of internal economic imbalances and an unforgiving global financial system. The persistence of strong dollar dynamics exacerbates capital flight and funding costs, leaving these economies more exposed to the ripple effects of weak global demand and investor risk aversion. As the world’s growth engines sputter—China’s malaise, Europe’s stagnation—the burden falls disproportionately on emerging markets, amplifying their vulnerabilities and limiting their ability to chart an independent course. The artificial credit driven business cycle is exposed at the margins. Without significant global stabilization or coordinated relief measures, these markets are likely to remain mired in cyclical fragility and structural disadvantage.
Key Market Movements
Copper
The markets continue to reflect the pervasive uncertainties of the global economic environment, with commodities and shipping indices signaling broad-based weakness. Copper, often regarded as a barometer of industrial health, saw its worst performance in over a month, dropping nearly 3% as demand from China faltered alongside sluggish global manufacturing activity. Similarly, aluminum and iron ore prices remain suppressed, unable to sustain any meaningful upward momentum, reflecting tepid construction activity and constrained demand across major economies.
(Source: CME Copper Futures Settlements: https://www.cmegroup.com/markets/metals/base/copper.settlements.html)
Baltic Dry Index
The Baltic Dry Index, a critical measure of shipping activity, has plummeted to new seasonal lows and an overall 17 month low, approaching levels last seen during the pandemic-induced collapses of 2020. This steep decline underscores the persistent slowdown in global trade flows, particularly as China’s economic recovery stumbles and European manufacturing struggles to regain footing . The broader implications for global supply chains and logistics networks are increasingly negative, with no clear catalysts for a turnaround.
(Source: MarineLink.com - Broad Sector Decline puts Baltic Index at 17-Month Low: https://www.marinelink.com/news/broad-sector-declines-puts-baltic-index-520421)
Gold
In the inflation-sensitive corners of the market, gold prices have remained steady, while the copper-to-gold ratio has approached multi-year lows, a clear signal of investors’ pivot toward safe-haven assets amid deepening concerns over economic stagnation. These movements reflect not just localized economic struggles but the overarching hesitancy of global markets to commit to risk amid persistent headwinds. I expect strength to persist in the gold price, but many should be surprised in the short to medium term in regards to dollar strength. In paradox to conventional though, I don't expect gold to respond poorly to dollar strength.
In aggregate, the market movements of late tell a clear story: optimism remains in scarce supply, with commodity prices, shipping activity, and investor behavior all pointing to a world economy grappling with the aftershocks of past crises and the weight of unresolved structural challenges. Until clarity emerges from key economic drivers—China’s recovery, the efficacy of monetary easing, and labor market stabilization—the markets are likely to remain in this holding pattern of restrained activity and muted expectations.
Inflation
The price inflation narrative remains tangled, with signals pointing to both persistence and decline depending on the metric of choice. Years ago, in 2019 to 2020, I told my subscribers to expect a kaleidoscopic outcome regarding price inflation. Up here, down there, stagnant here. This has certainly been playing out.
The PCE deflator for November slowed to 0.13% month-over-month, its smallest increase since August, while the annual rate ticked up slightly. Core inflation also decelerated, rising just 0.11% for the month, offering a reprieve for policymakers eager to downplay the "stickiness" observed in other measures like the CPI.
The disconnect between headline and core measures reveals the limits of aggregate indicators in capturing the nuanced pressures faced by consumers and businesses. Inflation in services, for example, continues to erode disposable incomes, while goods prices stabilize—leaving households in a precarious position. The consumer is caught between rising costs in non-negotiable categories and an inability to maintain spending levels, as evidenced by declining savings rates and real wage stagnation.
I must insist that we treat price inflation metrics as a rear-view mirror rather than a forward indicator. The deceleration in price increases does not equate to an easing of economic strain for households or businesses. Policymakers and market participants should focus on the structural elements underpinning price inflation, such as supply chain resilience, labor market conditions, and credit dynamics, rather than fixating on headline figures that offer only partial truths.
For investors and operators, the current environment warrants a cautious stance. Real assets with intrinsic value, such as commodities or infrastructure, may hedge against inflation's lingering uncertainties, while high-growth sectors reliant on cheap credit remain vulnerable when said credit is contracting. Ultimately, a clear resolution to the narrative will require stabilization in key global economies—China, Europe, and the United States—none of which appears imminent. Until then, vigilance and diversification remain the best tools for navigating an opaque inflation landscape.
To circle back, with the PCE deflator slowing to its smallest monthly increase since August and core inflation decelerating further there is evidence of a moderating trend. I would argue that these measures reveal transient disinflationary processes rather than entrenched inflationary pressures. The persistence of higher service costs underscores inefficiencies rather than systemic inflation, pointing to temporary factors like base effects and lingering distortions from supply chain disruptions.
Therefore, from a broader perspective, I consider it that inflation is less a dominant economic force and more a symptom of deeper structural weaknesses. Stagnant real incomes, constrained consumer demand, and global trade imbalances further bolster and reinforce disinflationary undercurrents. The focus on inflation as a primary concern risks overshadowing the more pressing issue: the stagnation of global economic growth.
Yes. You read that from me. Disinflation. Disinflation. Disinflation.
For now....
Monetary Policy Trends
A fitting way to conclude this update would be to focus on where these troubles are find their source - the monetary system and the policy that shed's some light, on what policy makers believe and what they are doing about it. The December rate cuts by the Federal Reserve and the European Central Bank encapsulate the prevailing uncertainty and divergence in global monetary policy. Both institutions reduced rates by 25 basis points, yet the market’s interpretation of their actions could not have been more different. The ECB’s deliberate and steady approach to easing was perceived as "hawkish," reflecting a focus on managing expectations, while the Federal Reserve’s more erratic adjustments revealed persistent indecision and an inability to establish a coherent narrative. Seems to me that Mr. Magoo is firmly behind the wheel.
In the United States, the Fed’s policy swings continue to underscore its reactive posture, driven by short-term data points rather than a clear strategic framework. This inconsistency has created a volatility premium in Treasury markets, with Gundlach's favorite two-year yields oscillating wildly as investors attempt to decipher the Fed’s next move. The “dots,” which are anything but reliable, only serve to amplify confusion, as policymakers struggle to reconcile a deteriorating labor market with inflationary pressures that appear more entrenched than transitory. In contrast, the ECB’s measured actions reflect a clearer, if limited, strategy. By maintaining tighter control over market expectations, the ECB has avoided the kind of volatility seen in US Treasury yields, with European bond markets exhibiting relative stability. However, this steadiness belies the reality that the ECB’s rate cuts have so far failed to generate meaningful economic momentum. Across Europe, the labor market remains fragile, consumer confidence wanes, and industrial activity is stagnant—signs that monetary policy alone cannot address deeper structural issues.
These divergent paths highlight the broader challenge of contemporary central banking: the diminishing returns of rate-driven policy tools. As both institutions grapple with the constraints of their mandates, the underlying question remains whether monetary easing, in its current form, is capable of fostering sustained economic recovery—or if it has become yet another instance of prescribing the disease as the cure. I opine it's the latter.
